Reserve Bank predicts unemployment to hit 9% and house prices to fall, says low interest rates here to stay

The Reserve Bank says very low interest rates are locked in as it seeks to keep the economy - struggling from the Covid-19 lockdown - afloat.

It is also nearly doubling its bonds scheme, effectively pumping billions of dollars into the economy, as it uses all the tools at its disposal to tackle the crisis.

The central bank made the moves as it predicted the country would be hit hard by the current circumstances.

The bank predicts:
Unemployment to hit 9%
Inflation to possibly fall below the 1%-3% range
Net immigration to hit zero and then rebound to only 24,000 a year
House prices to fall 9%

The Official Cash Rate, which governs interest rates in New Zealand, is being held at 0.25 per cent. This dropped from 1 per cent in March, with the Reserve Bank pledging to hold it for at least a year.

Reserve Bank Governor Adrian Orr said at the time they would turn to other measures to stimulate the economy before dropping the Official Cash Rate further. 

Mr Orr said they put the OCR at 0.25 per cent for a year to give certainty to those pricing interest rates and "to highlight to the banks and the general public we are not contemplating negative interest rates or a negative OCR".

There are indications the cash rate could even go into negative territory, the Reserve Bank's monetary policy committee noted at its May meeting.

Its bonds fund, known as Large Scale Asset Purchase (LSAP), has also been increased to a potential $60 billion, up from $33 billion. 

That includes Government Bonds, Local Government Funding Agency Bonds and now NZ Government Inflation-Indexed Bonds.

Mr Orr said today's expansion aims to "continue to reduce the cost of borrowing quickly and sharply".

"This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done.

"We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers.

"It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme."

Economist Cameron Bagrie anticipated the Reserve Bank's move this morning while presenting to Parliament's Covid-19 Select Committee. 

He thought the "Qualitative Easing" programme - sometimes referred to as "printing money" - would go slightly over $60 billion. 

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